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Groupon and The Gap: Local coupon sites could be a bad fit for national chains

Groupon is one of the e-commerce success stories of the last year. The group buying site’s revenues are skyrocketing, and its half price deal with Gap sold 441,000 units last week. That translates to $11 million in sales in one day. Groupon has now announced that more national deals will roll out soon.

This is clearly good news for Groupon. But will it be good for Groupon’s partners? Maybe not.

On average, Groupon gains about 500,000 subscribers a
week. Last week, after running the Gap promotion offering $50 of merchandise for $25, the site added 750,000
new subscribers.

For Gap, there are clear benefits from the Groupon partnership. In addition to the $11 million spent at Groupon that day, Gap is expecting customers with Groupons for $50 of merchandise to spend more once they’re in store (the coupon is not redeemable online). If they spend somewhere around $75 to $100 as Gap is expecting, that will come out to $33 million to $44 million in sales when all the Groupons are redeemed.

But it’s not all revenue for the retailer. First, it’s not likely that all 441,000 purchasers will show up to redeem their coupons. While many will, all of that revenue won’t be going to The Gap. Groupon does not reveal individual revenue sharing deals, but on average it splits profits with its partners 50/50. Which means that on top of the already discounted merchandise that Gap has on offer, the retailer will bring in even less from each Groupon user.

As Mashable points out, the chain could lose over $8 million on the nearly half a million customers who walk in the door with a Groupon.

Online deals can work out extremely well for small local retailers looking for name recognition and new customers. Well-known brands could simply foster the impression their retail products are overpriced if they frequently appear on such sites.

Gap is hoping customers who may have moved on to new brands will come in with Groupons and start shopping with them again. Perhaps that will happen. One of Groupon’s key selling points is that unlike other advertising options, a Groupon deal contributes directly to sales. A major ad campaign from The Gap rarely has a hard number, like $11 million in sales, to prove effectiveness.

Yet this Groupon deal wasn’t exactly free. Part of what led to the deal’s success came from the social media campaign around the offer. According to ClickZ:

“A marketing mix involving social media, affiliates and an ad on Digg supplemented Groupon’s email program in the effort.”

It’s not clear who paid for the ads surrounding the deal. In addition, Gap has not yet said whether the offer will be a loss leader for the company.

In this instance, the novelty of a national retailer working with Groupon generated plenty of press and word of mouth. That isn’t sustainable for national brands that follow.

For Groupon, the Gap campaign was a complete success. At one point, the site was selling more than five times as many deals as usual. And its prowess is growing. According to Groupon, 35,000 businesses are currently waiting to be featured, and 700 new U.S. businesses approaching it each day.

Those brands should examine what they’re getting before jumping in. According to the Wall Street Journal, only 22% of Groupon customers return to a business after redeeming discounted coupons.

For a small local store, publicity could be enough. But for the national retailers Groupon is now courting, that’s not good news.

Beyond selling items at a discount, companies are splitting discounted revenues with Groupon. There’s also fulfilment to worry about. Groupon often doesn’t have tight control over how many people will actually purchase any given deal.

According to Jennifer London, a small business owner the Journal spoke with, the response to her Groupon was more than expected. But few buyers turned into regulars. Without a limit set for her offer, she sold more smoothies at a loss than expected. The only thing that saved her were Groupon users who never bothered to redeem their offers. As she said:

The newspaper business may be old and stodgy, but it’s quite evident
that its future depends on embracing the internet. And internet
technologies.

One of those technologies: web analytics. Yesterday, The New York Times
detailed how newspapers, once leery of web analytics, is increasingly
taking a second look, recognizing that the real-time consumption data
web analytics can provide is too valuable to ignore.

As web designers we can only do so much for you the client. You can have the best website in the world, but if your customer service stinks users won’t come back.

I went to meet with a new client yesterday and was blown away by their commitment to customer service. Not only had they addressed every one of their customers’ points of pain, they had gone above and beyond in so many ways.

You’re in the market for a new car. You’re not having luck finding what you want online through the local dealerships. So you write a blog post expressing your frustration. Less than five minutes later, you have an email from somebody who wants to help you find and buy the car of your dreams. You purchase a new car from him a few weeks later.

Crazy? Maybe. But it’s not fiction. It’s how Chris Brogan, head of a marketing agency, purchased a 2010 Chevrolet Camaro SS.

According to a newly-published study published by Pew, nearly three-quarters of Facebook users polled said they didn’t know that Facebook generates and stores data about their interests and traits, and, when they came to learn this, over half indicated that they were uncomfortable with Facebook’s practice.

Mastercard, the third-largest credit card processor in the US, has announced a new policy that will make it more difficult for some businesses to automatically convert free trials into recurring subscriptions.